Accounting Notes
Inventory Systems:
Periodic - does not keep a continuous record of inventory on hand - physical inventory is required at least once a year
Perpetual - keeps a continuous record of inventory on hand - an annual physical inventory is still required
Journal entries for Purchases and Sales of Inventory:
Perpetual System Periodic System Credit Purchases Inventory Purchases Acco unts Payable Accounts Payable Credit Sales To record sale of merchandise: Acco unts Receivable Accounts Receivable Sales Sales
To record cost of merchandise: Cost of Goods Sold No entry required Inventory End of Period Transfer Beg. Inv. Bal. To COGS: Entries Cost of Goods Sold Inventory No entries required Record End. Physical Inventory: Inventory Cost of Goods Sold
Transfer cost of purchases to COGS: Cost of Goods Sold Purchases
Page 1
Student Learning Assistance Center, San Antonio College, 2004 Accounting Notes
Determining the Cost of Goods Sold (Periodic System):
Beginning Inventory Balance + Purchases = Cost o f Goods Available for Sale - Ending Inventory Balance = Cost o f Goods Sold
Inventory Costing Methods:
(1) Specific Unit Cost - Cost method based on the specific cost of particular units of inventory (2) Weighted Average Cost - Co st method based o n the weighted average cost of invent ory purchased and held during the period (3) FIFO - Cost method by which the first costs into inventory (first units purchased) are the first costs out t o cost of goods sold (first units sold). Ending Inventory consists of the most recent purchases. (4) LIFO - Cost method by which the last costs into inventory (last units purchased) are the first cost out t o cost of goods sold (first units sold). Ending Inventory consists of the beginning inventory and the earliest purchases made.
Accounting Principals and Concepts:
Consistency Principle - a business should use the same accounting met hod and procedures from period to period.
Disclosure Principle - a business ˇ financial statements must report enough information for outsiders to make knowledgeable decisions about the business.
Materiality Concept - a business must perform strictly proper accounting only for items and transactions that are significant to the business ˇ financial statements.
Conservatism - a business should report the least favorable figures in the financial statements
Lower of Cost or Market - requires that an asset be reported in the financial statements at whichever is lower - its historical cost or its current market value.
Page 2
Student Learning Assistance Center, San Antonio College, 2004 Accounting Notes
Est imating Inventory:
Gross Margin (Gross Profit) Method:
Beginning Inventory $xxxxx Purchases xxxx Cost of Goods Available for Sale $xxxxx Cost of Goods Sold Sales $xxxxx Less Est. gross margin of ___% (xxxxx) Est. Cost of Goods Sold ( xxxxx) Est. Cost of Ending Inventory $xxxxx
Page 3
Student Learning Assistance Center, San Antonio College, 2004